Copper stocks fail to tap into surging price

The copper price is continuing to trade near its record high, but Australian copper stocks appear to have fallen out of favour with investors.

Equinox Minerals
has slumped 12.6 per cent from its 12 month high touched in November,
OZ Minerals
has shed 10.6 per cent from its peak reached in the same month, and
PanAust
has lost 16.3 per cent since reaching a 12 month high in October.

On Wednesday Credit Suisse became the latest broker to talk down the expectations of local producers. The note follows a similar release from Citigroup last week, where analyst Craig Sainsbury downgraded OZ Minerals to “sell" from “buy" and PanAust to “hold" from “buy".

Credit Suisse is even more pessimistic about the prospects for Australian copper producers it has an “underperform" rating on Equinox Minerals, OZ Minerals and PanAust.

“Australian copper stocks appear relatively expensive against global peers," Paul McTaggart said. “We would need to assume either spot in perpetuity or a significant premium to spot for the next couple of years to achieve NPVs [net present value’s] that represented fair value relative to current equity prices.

“In our view, copper price expectation aside, none of the above names deserves a premium to NPV and arguably each deserves some discount to NPV or use of a higher discount rate to reflect stock specific risk."

The broker’s favourite pure-play large cap copper plays are Freeport and Southern Copper with Xstrata of the diversifieds the most leveraged to copper. Its preferred picks in the mid-tier copper space are Canadian miners First Quantum Minerals and Quadra FNX Mining.

Locally, Mr McTaggart is downbeat about the outlook for producers.
Equinox
, one the mining sectors biggest success stories over the past decade, is rated “underperform" by his colleague Michael Slifirski. The stock has a 12 month price target of $6.30, which is 8 per cent above Equinox’s current $5.80 share price. Credit Suisse rate stocks in the S&P/ASX 200 “underperform" if they are forecast to deliver less than 12 per cent over the next 12 month period.

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“Equinox’s previous significant discount to NPV has unwound as commissioning challenges have been overcome and nameplate mining and milling has now been achieved." Without further help from rising copper price it appears Equinox is trading at fair value, the broker added.

Equinox’s merger with Citadel was labelled a “good deal" for the miner by Mr Slifirski, however, he says the development and commissioning of new projects can be a “punishing period" for investors compared to the value leverage phase of exploration.

OZ Minerals, rated “underperform" by Mr Slifirski, has its own set of problems, including a mine reaching the end of its production life. OZ Minerals future will depend on exploration success of which there is no “near-term" indicator, he said, or a value adding transaction.

“A contracting management team and commitment to returning capital suggests low management confidence in either." Credit Suisse has a $1.40 12 month price target on OZ Minerals, which is roughly 17 per cent below the last traded price.

PanAust has the potential to follow in the footsteps of Equinox, but its future hinges on a series of government approvals. The company’s Ban Houayxai deposit in Laos is currently waiting on a development permit from the government. In Chile the company is still finalising its acquisition of the Inca de Oro operation from Chilean government controlled Codelco.

Mr Slifirski said the company’s Thailand exploration projects appeared to have “real commercial potential", but may be significantly constrained by permitting challenges.

Credit Suisse has a 70¢ 12 month target price on PanAust, which is line with the stock’s current price.

Market already pricing high copper

The chart below from Credit Suisse shows the historic relationship between copper prices and the global copper equity index. From it, the broker concludes that current copper equities are (in aggregate) already being priced off an expectation that copper prices will move higher or, alternatively, that copper prices can stay higher for longer.